A. Caruso, L. Reichlin, G. Ricco - The Legacy Debt and the Joint Path of Public Deficit and Debt in the Euro Area

 

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Abstract:  This paper studies the joint dynamics of public debt and public deficit in the euro area for the period 1981-2013 and compute projections up to 2020. We show that, since 2009, public debt and public deficit have been negatively related. On the basis of a counter-factual simulation that conditions on past correlations with a large number of macroeconomic indicators and the observed GDP path since 2008 we find that the negative relation is anomalous with respect to previous historical experience. In contrast, private savings and private debt since 2008 have behaved in line with past experience. We define and estimate the “legacy debt” of the 2008 crisis and show that, if GDP and inflation will behave according to the International Monetary Fund (IMF) projection, by 2020 it will still account for 15% of total public debt. 

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© 2018 by Giovanni Ricco.

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